any guru knows how the risk factor is determined? the text doesn’t explain it at all and just throws out a formula… i.e. risk factor of 4.3 - what exactly does this mean?
risk factor will be given.
It usually comes about after a psychological profile test that rates the investors risk aversion from say 1 to 10 or from low to high. The higher the number the more risk averse…you won’t have to know how to arrive at this number, as Striker stated it will be given.
I saw a question in one of the sample exam where the answer referred to convexity and duration as the the determining factor in arriving at this number. I dont know what it means but I am repeating the answer for what it is worth…may be some one else could explain it a bit further.
Krishna1 you might be referrign to a different type of Risk factor…I believe Ryanunsw was referrign to the risk factor that is used in this formula: E® - Variance * .005 * Risk Factor
I think ryanunsw and krishna1 are talking about credit deriviatives, and bigwilly about risk aversion when calculating expected utility
Whoops 
REGARDLESS they will provide this risk factor… They need to come up with more names…